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Beware the hidden costs of recruitment finance

Recruitment is big business. The sector is currently one of the fastest growing in the UK economy, having exceeded even the most optimistic of expectations each year since the end of the recession. This, unsurprisingly, has led to an increased demand for recruitment finance, but is the traditional factoring option really the right solution for ambitious recruitment business owners?

Factoring has long been the recruitment finance option of choice for many recruitment business owners. And while there are some reasons to factoring, there are some notable drawbacks with this type of funding that recruiters need to be aware of.

First let’s take a look at the plus points.

Factoring enables you to get instant access to your cash, typically funding up to 80-90% of the total value of your invoice as soon as those invoices are raised. This bridges the gap between what you need to pay out in the here and now and when your client settles your invoice. And because there are so many factoring companies around, prices are usually very competitive.

All sounds well and good up to now, but like most things there are costs associated with this method. Many factoring providers will attempt to seduce you with headline rates, but this is likely to be a false economy for several reasons.

Firstly, you will pay interest on the amount advanced to you and there will be an additional amount to cover the finance provider’s administration costs (i.e. service fee).

Secondly, the longer it takes your client to pay the more expensive your factoring facility becomes, with interest continually accrued over time. For instance, if your client’s debt reaches the 90-day maximum payment term you could be faced with additional re-factoring charges on top of the interest and administration costs you are already paying for.

Not only that, this will also reduce the total amount that you can borrow. So not only will you incur additional costs, both your profit margin and access to available funds will be significantly reduced too.

Thirdly, perhaps most important of all, factoring by default imposes a concentration limit – the maximum amount the provider will cover for a single client. If you work for a large client, that accounts for as much as 20% of your total monthly billings and the concentration limits in place restrict you from gaining access to those funds, your business is going to run into some major problems – will you have enough set aside to pay out what you need to? can your business even continue to trade without these much-needed funds?

It is at this point when you begin to realise you should have checked the small print. Factoring contracts come with many caveats and the caps are often hidden somewhere that are not all that obvious to find. But it is critically important to be aware of them and understand precisely what they mean.

Suppose your factoring provider offers you a limit of £75k or even £150k – at the outset that may seem attractive. However, what happens once you hit that cap?

Quite simply you won’t get any money paid to you that week, which means you cannot pay your workers or other essential expenses either. All of which could see the recruitment business you have worked so hard to build and grow fall by the wayside within a matter of days. Can you really afford to take that risk?

Any cap on funding is an effective brake that is applied to slow down your growth – something that any forward-thinking and ambitious recruiter will not want. After all, you want to grow at your own pace rather than have that pace determined for you, don’t you?

In addition to the issues highlighted above, one of the biggest concerns that many former users of factoring service providers report is the lack of recruitment industry understanding. Not to mention the fact that you really do need to be a cash flow management expert to fully understand all the ramifications associated with using a factoring provider.

The difference between a finance provider that truly understands the nuances and challenges recruitment business owners face and those who don’t, becomes obvious every time you reach the point when the product or service you have no longer seems to be the one that is right for you.

That's where we differ – we have over 70 years’ experience of servicing successful recruitment businesses, it’s in our DNA.

Simplicity is the specialist provider of recruitment finance and outsourced administration solutions for the UK recruitment industry. We have worked with hundreds of recruitment start-ups over the last 13 years and understand the sector better than most. That’s why we are the recruitment finance partner of choice.

With us, 100% recruitment finance, debt protection, payroll and credit control don’t come as optional – they come as standard.